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Section 106 Agreement

Section 106 agreements are important aspects of the commercial development world, sitting right at the heart of good planning for community benefits. Whether you are a developer or a member of the Local Planning Authority, section 106 agreements will be a big part of your world, if they aren’t already. 

In this article, we look into the aspects of section 106 agreements, including what they are, why they are needed, who they help, and how to ensure they are legally compliant. 

If you are a developer or stakeholder wanting to understand your obligations and make sure your projects contribute positively to local communities, dive right in! 

What is a section 106 agreement?

Why is a section 106 agreement needed?

How do section 106 agreements work?

What can be included in a section 106 agreement?

How does a section 106 agreement affect commercial property development?

What are the key tests for planning obligations under a section 106 agreement?

Who is involved in drafting a section 106 agreement?

Can you negotiate or refuse a section 106 agreement?

Can a section 106 agreement be modified or discharged?

What happens if you don’t comply with a section 106 agreement?

What is the difference between a section 106 agreement and the community infrastructure levy?

How do section 106 agreements impact future development and property transactions?

How can you ensure legal compliance with a section 106 agreement?

What role does a solicitor play in section 106 agreements? 

What is a section 106 agreement?

A section 106 agreement, in the context of commercial property, is a legal contract made between a local planning authority and a property developer. This type of agreement is outlined under Section 106 of the Town and Country Planning Act 1990. Its primary function is to mitigate the impact of a new development on the local community and infrastructure​. 

When a developer wants to build or modify a commercial property, their project might increase the demand on local services like roads, schools, or parks. A section 106 agreement is used to make sure that the developer contributes to the improvement or provision of these services, making the development acceptable in planning terms and beneficial or at least not detrimental to the local area.

These agreements are tailor-made for each project and can include a variety of obligations. For example, a developer might agree to provide a certain amount of affordable housing, contribute to the cost of new road improvements, or fund the expansion of local schools. 

The specific obligations are negotiated between the developer and the local planning authority, aiming to address the direct impact of the proposed development​. 

Understanding and managing a section 106 agreement properly is crucial for developers, as it directly affects the feasibility, costs, and timeline of their projects. Professional advice from solicitors and planning consultants can be invaluable in drawing up these agreements, ensuring they meet legal standards and serve the developer's and community's interests in the right way.

Why is a section 106 agreement needed?

A section 106 agreement is needed to make sure that when a new development is built, it does not impact the local community or infrastructure in a negative way. It serves as a mechanism to make developments acceptable in planning terms, which otherwise might not be allowed to go ahead.

One of the primary reasons for a section 106 agreement is to control the impact of new developments on local services and facilities. For example, a new commercial project could increase traffic, putting more pressure on local roads. Or, new homes built as part of a development could increase the need for more school places. The section 106 agreement gives the developers responsibility to address these impacts, often through financial contributions or direct actions, such as building new facilities or upgrading existing ones​.

Another key aspect of why section 106 agreements are necessary is their role in legal and planning processes. They provide a formal, legally binding way for planning authorities to secure contributions to infrastructure and services, which are essential for sustainable development. Without such agreements, local authorities might lack the means to ensure that developers contribute to the local area's well-being, potentially leading to developments that could harm local communities or fail to integrate with them. 

How do section 106 agreements work?

Section 106 agreements function as legal contracts between a developer and a local planning authority. 

When a developer submits a planning application, the local planning authority assesses the potential impact of the proposed development on the local area. If the authority determines that the development would have significant impacts that need to be mitigated, it will require the developer to enter into a section 106 agreement.

The terms of the agreement are then negotiated between the developer and the local planning authority. These negotiations aim to address specific impacts identified during the planning process, making sure that the development can be made acceptable in planning terms. The negotiations focus on things the developer must do, which could range from financial contributions to physical works​. 

The legal basis for section 106 agreements is found in the Town and Country Planning Act 1990. The agreement is legally binding, making sure that developers carry out the things they promise to do - contributing towards local infrastructure, public services, or other community benefits directly related to the development. The obligations can be either specific actions the developer must take or financial contributions to the local authority​. 

The obligations also "run with the land," meaning they apply not only to the original developer but also to any subsequent owners of the site. Local authorities have various means to enforce these agreements, including through the courts if necessary. Compliance is monitored by the local planning authority, which can take enforcement action if the developer fails to fulfil their obligations​. 

There are provisions for modifying or discharging (ending) obligations under a section 106 agreement, but this requires both the developer and the local authority to agree. In some cases, if certain conditions change or the obligations are deemed no longer necessary, the agreement can be renegotiated or ended, subject to legal and planning considerations​. 

What can be included in a section 106 agreement?

A section 106 agreement can include a wide range of obligations that a developer agrees to fulfil as part of gaining planning permission for their project. 

The types of things that can be included are:

How does a section 106 agreement affect commercial property development?

Firstly, a section 106 agreement affects commercial property developers as they might be required to make financial contributions towards local infrastructure or services. These obligations can significantly affect the overall cost of a development project. For example, contributions towards upgrading local roads, schools, or healthcare facilities due to the increased demand from the development can add substantial costs​. 

This can also impact the feasibility and viability of a commercial property development. The obligations to provide affordable housing or contributions to local services might change the profit margins of a project, and so developers need to consider these additional costs early in the planning stage to ensure that the project remains viable​. 

Secondly, securing planning permission hinges on agreeing to and fulfilling the terms of a section 106 agreement for developments that require it. Failure to follow through with these obligations can result in legal enforcement actions by the local planning authority, potentially leading to delays, additional costs, or even the halting of the development project​. 

And for developments that include residential units, things like having to contribute to the provision of affordable housing can affect the marketability and sales strategy of the property. Developers may need to plan for a mixed-use or mixed-income development, affecting both the design and marketing of the project. 

There are positives here though, we promise. By meeting the obligations of a section 106 agreement, it can positively impact a developer's relationship with the local community and enhance the company's reputation. Contributing to local infrastructure, services, and amenities can demonstrate a commitment to social responsibility and community well-being, potentially facilitating future projects in the area. 

And, by improving local infrastructure and services, a section 106 agreement can increase the long-term value of the development and the surrounding area. This can make the property more attractive to future buyers or tenants, enhancing its investment potential. 

What are the key tests for planning obligations under a section 106 agreement?

The key tests for planning obligations under a section 106 agreement make sure that the obligations outlined by the local authority are justified and directly related to the development. Otherwise, developers could land themselves with a ‘to do’ list that is completely unrelated or unfair! 

The obligations must meet three main criteria:

1. Necessary to make the development acceptable in planning terms

This test ensures that the obligations imposed on a development are essential to make the development acceptable to the local planning authority. The aim is to mitigate any adverse effects the development might have on the local area, ensuring that it contributes positively to the community or at least does not harm it​. 

2. Directly related to the development

The obligations must have a clear and direct link to the development itself. This means that the measures or contributions required of the developer should address the impacts specifically generated by their project. This test prevents local authorities from imposing unrelated or disproportionate requirements on developers​. 

3. Fairly and reasonably related in scale and kind to the development

The scope and scale of the obligations should be proportionate to the size and type of the development. This ensures that developers are not overburdened with excessive or unrelated contributions that could render a project unviable. It balances the need for infrastructure and services with the developer's capacity to deliver the project​. 

Who is involved in drafting a section 106 agreement?

Drafting a section 106 agreement typically involves several people who work together to ensure that the obligations outlined are fair, relevant, and directly related to the impacts of the proposed development. 

The Local Planning Authority plays a crucial role in drafting a section 106 agreement. They represent the community's interests and are responsible for making sure that the development's impact is adequately mitigated through the agreement. The LPA's planning officers and legal advisors work closely with developers to negotiate the terms of the agreement​. 

Then of course, the developer or landowner who is proposing the development is directly involved in negotiating and drafting the Section 106 Agreement. They must agree to the obligations imposed, which often include financial contributions or actions they must undertake as part of the development process. Developers typically have legal and planning consultants to represent their interests and negotiate terms that are feasible and aligned with their project's objectives​. 

Both the LPA and the developer will likely involve legal advisors or solicitors specialising in planning law to ensure that the agreement is legally sound and enforceable. These legal professionals play a critical role in drafting the document, advising on legal implications, and ensuring compliance with relevant laws and regulations​. 

Depending on the nature of the development and the specific obligations under discussion, other consultants and specialists may be involved in the drafting process. This can include planning consultants, environmental specialists, traffic consultants, and others who provide expert advice on mitigating the development's impacts​. 

In some cases, representatives of the local community or stakeholders directly affected by the development may be consulted during the drafting process. While not directly involved in drafting the agreement, their input can be crucial in identifying community needs and impacts that the agreement should address.

Can you negotiate or refuse a section 106 agreement?

Yes, there is room for negotiation in a section 106 agreement, and in certain circumstances, a developer might have grounds to refuse specific obligations. 

The negotiation process is a critical part of establishing a section 106 agreement. Both the developer and the local planning authority (LPA) have a vested interest in reaching an agreement that makes the proposed development acceptable in planning terms. Developers can negotiate the terms of the agreement to ensure that the obligations are directly related to the development, necessary, and fairly and reasonably scaled. 

During negotiations, developers can present arguments and evidence to demonstrate that certain proposed obligations may not meet the key tests for planning obligations under section 106, which are that they must be necessary to make the development acceptable in planning terms, directly related to the development, and fairly and reasonably related in scale and kind to the development​.  

It's also possible to argue that certain obligations could render a project unviable. In these cases, developers might propose alternative solutions or look to adjust the scale of the contributions to find a balance that satisfies both parties.

Refusing to enter into a section 106 agreement is more complicated and can have significant consequences. If a developer and the LPA cannot agree on the terms of a section 106 agreement, the LPA may refuse planning permission for the development. This stance is typically taken if the LPA believes that without the agreement, the development would have unacceptable impacts on the community or local infrastructure​. 

However, if a developer believes that the LPA's demands are unreasonable or not directly related to the development, they might choose to refuse to agree to the terms and instead appeal the decision to refuse planning permission. This process involves presenting the case to an independent inspector or, in some cases, to the courts. It's a route that requires careful consideration, given the potential for delays and additional costs​. 

Developers should seek legal advice when considering negotiations or refusal to ensure that their actions are informed by a comprehensive understanding of planning law and practice. 

Can a section 106 agreement be modified or discharged?

Yes, a section 106 agreement can be modified or discharged (ended). 

Under section 106A of the Town and Country Planning Act 1990, parties to a section 106 agreement can apply to have the agreement modified or discharged after it has been in effect for five years. 

The process allows for the terms of the agreement to be renegotiated to reflect changes in circumstances or to correct aspects of the agreement that may no longer be necessary or relevant to the development or the community​. 

The application to modify or discharge must be made to the local planning authority (LPA), which will consider whether the reasons for the original obligations still apply. The LPA may agree to the modifications if they believe that the objectives of the original agreement can still be met in a different way or are no longer relevant.

Similarly, a section 106 agreement can be fully discharged if both the developer and the LPA agree that the obligations are no longer necessary or relevant. This might happen if the development has been altered in such a way that the original reasons for the obligations no longer apply, or if changes in policy or local circumstances mean that the obligations are no longer appropriate​. 

If the LPA refuses an application to modify or discharge a section 106 agreement, the applicant has the right to appeal to the Secretary of State. The appeal process involves a review of the LPA's decision, during which the merits of modifying or discharging the agreement will be considered anew​. 

What happens if you don’t comply with a section 106 agreement?

If you don’t comply with a section 106 agreement, it can lead to serious consequences for developers. 

The LPA has the authority to enforce the obligations set out in a section 106 agreement. If a developer fails to meet with the terms of the agreement, the LPA can take legal action to ensure compliance. This might include issuing an enforcement notice requiring the developer to fulfil their obligations within a specified timeframe, or a fine​. 

In some cases, the LPA may issue a stop notice, which halts all work on the development until the developer complies with the section 106 agreement. This can lead to significant delays and increased costs for the project​. 

For more serious breaches or where there is a risk of irreversible harm, the LPA might apply for an injunction from the court to prevent further breaches of the agreement. Injunctions can be a powerful tool to ensure compliance but carrying significant legal and financial implications for the developer​. 

Failure to comply with a section 106 agreement can also have long-term implications for developers, affecting their reputation and potentially impacting their ability to get planning permission for future projects. LPAs might view developers who have previously failed to comply with such agreements as higher risk. 

What is the difference between a section 106 agreement and the community infrastructure levy?

The section 106 agreement and the Community Infrastructure Levy (CIL) are both mechanisms used in England and Wales to ensure that developers contribute to the infrastructure and services needed to support new developments. However, they serve different purposes and operate in distinct ways. 

Section 106 Agreements, under the Town and Country Planning Act 1990, are legal agreements between local authorities and developers to mitigate the impact of new developments on the local community. They are tailored to specific developments and can address a wide range of issues related to the development's impact​. 

The Community Infrastructure Levy (CIL), introduced by the Planning Act 2008, is a fixed charge levied on developers to fund general infrastructure projects that support the development of the local area. Unlike section 106, which is negotiated, CIL charges are predetermined based on the size and type of the development​. 

CIL provides a more predictable framework for developers, as charges are set out in a charging schedule by the local authority, based on the size (per square metre) of the new development. It aims to ensure a fair and transparent method for funding infrastructure across a wider area​. 

The revenue from CIL is pooled and used by local authorities to fund a variety of infrastructure projects, such as schools, roads, and medical facilities, which may not be directly related to the site of the development​. 

It is worth noting that CIL is not applicable everywhere; it is only charged by local authorities that have chosen to implement it and have set a charging schedule. Section 106, on the other hand, can be applied by any local authority as part of the planning permission process​. 

How do section 106 agreements impact future development and property transactions?

A section 106 agreement can impose specific restrictions on how a property is developed or used, to ensure that the development contributes positively to the local community or mitigates its impacts. These restrictions can affect future development possibilities on the site, requiring any new developments to comply with the terms set out in the original agreement​.

As we also know, section 106 agreements often include financial obligations that can affect the financial viability of future developments. Developers need to account for these costs in their project budgets, which can influence the types of projects that are feasible on a property, subject to a section 106 agreement​. 

Many Section 106 agreements also include provisions for affordable housing, which can dictate the percentage of affordable units in a residential development. This can impact the marketability and financial model of future residential projects on the site​ 

The obligations under a Section 106 agreement can affect the value of a property. While contributions to local infrastructure might enhance the area's appeal and potentially increase property values, the costs and restrictions associated with the agreement might also limit the development potential of the property, affecting its market value​. 

For future property transactions, the presence of a section 106 agreement requires careful legal and financial due diligence. Buyers need to be aware of any obligations or restrictions that come with the property and assess how these might affect their intended use or development of the site. 

The existence of a section 106 agreement can influence future planning permissions. Local planning authorities will consider the terms of existing agreements when assessing new planning applications, ensuring that new developments are consistent with the aims and obligations of the original agreement​. 

Finally, obligations under Section 106 agreements are attached to the land, not the original developer. This means that future owners of the property will be bound by the terms of the agreement, making it crucial for potential buyers to understand these obligations fully before proceeding with a purchase​. 

How can you ensure legal compliance with a section 106 agreement?

First things first, enlist the help of a solicitor! A commercial property solicitor is experienced in section 106 agreements, and will make sure it meets legal requirements from the outset, detail the obligations to you clearly, and help in negotiations. 

Make sure you have a comprehensive understanding of the obligations in the section 106 agreement. This includes knowing the financial contributions, development restrictions, and any other conditions tied to the agreement. It's crucial for all stakeholders, including developers, property owners, and future buyers, to be fully aware of these. 

Always maintain clear and open lines of communication with the local planning authority (LPA) and ensure that all correspondence and agreements are well-documented. Keeping detailed records of all interactions, submissions, and approvals can be invaluable, especially if disputes arise or clarifications are needed regarding the obligations.

You should also conduct regular reviews and audits of the development project to ensure that all aspects are in compliance with the section 106 agreement. You should monitor progress on fulfilling the obligations, such as making scheduled contributions or adhering to development restrictions. 

A really smart thing to do is to engage with the local community, so stakeholders can provide valuable feedback on the development's impact and the fulfilment of the agreement's obligations. Community engagement can also help maintain a positive relationship with the local community, which can be beneficial for both immediate and future projects.

Develop and implement a compliance strategy that outlines how the obligations will be met, assigns responsibilities to team members, and sets deadlines for critical milestones. A clear strategy helps ensure that all team members are aware of their roles in fulfilling the agreement's obligations and can plan their activities accordingly.

What role does a solicitor play in section 106 agreements? 

A solicitor plays a crucial role in negotiating, drafting, and ensuring compliance with section 106 agreements. Their involvement will help both the developer and the local planning authority (LPA), giving expert advice and guidance. 

A solicitor will assist in:

• Negotiating the terms of the section 106 agreement and advocate on behalf of their client (Developer or LPA)

• Providing legal advice and guidance regarding the implications of the section 106 agreement

• Reviewing, modifying or discharging a section 106 agreement

• Ensuring legal compliance 

• Dispute resolution between the developer and the LPA

• Due diligence for property transactions

Get support with Lawhive 

Whether you are in the negotiation stages of a section 106 agreement, or looking to modify or discharge a section 106 agreement, Lawhive can support you. 

Our team of expert commercial property solicitors are experienced in all aspects of section 106 agreements, and are ready to give you personalised legal advice today. 

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